Poor recovery performance of existing rural credit institutions (Rangarajan 1996, p. 68).

High operational costs

NGOs & Micro-Finance

NGOs are better at credit recovery but have their limitations.

NGOs cannot match the economies of scale of a comprehensive system of banking.

Transactions costs are inevitably borne by NGOs or members of self-help groups themselves, including income-poor women.

Micro-credit advances are small, short-term and high-cost. Interest rates on these loans are typically 30 per cent per annum, as compared to 36 per cent on loans from informal lenders. Micro finance under above circumstances is "limited to small, expensive and short term consumption loans".

Credit Starvation for Productive Purpose

With more than 70% of loans being taken for consumption purpose, there is gross inadequacy of credit, especially for crop cultivation and other productive activities. The growing and unmet demand for credit, both for direct production as well as for demands of health, education, and other needs, is resulting in "credit starvation" among rural households. The prime reason is large number of already indebted households (see figure).

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* Contributed by -
Meenal Nigam & Vivek Patni,
NITIE, Mumbai.